Thursday, 9 July 2015

European Union: French tax consolidation regime contrary to EU law, according to AG Kokott

Advocate General (AG) Kokott of the Court of Justice of the European Union (CJEU) issued her opinion on 11 June 2015 in the Groupe Steria case, concluding that the French tax consolidation rules infringe EU law because a domestic group of French companies can obtain certain tax benefits that are not available to companies that are residents of other EU member states. According to AG Kokott, this is an impermissible restriction of the freedom of establishment principle in the Treaty on the Functioning of the European Union (TFEU). The administrative court of appeal of Versailles had referred the case to the CJEU in 2014.
Under French tax law, when a French parent company receives dividends from a subsidiary, the dividends are 95% tax exempt under the domestic participation exemption (provided certain requirements are met). The remaining 5% is deemed to represent nondeductible costs and is taxed at the standard corporate income tax rate. The 95% participation exemption applies regardless of whether dividends are received from a French subsidiary or a subsidiary in another EU member state. However, under a special rule in article 223 B, paragraph 2 of the French tax code, the 5% deemed expenses may be deducted from profits if a French parent company and its French subsidiaries are members of a tax consolidated group, with the result that a full exemption can be obtained. However, a company that is not resident in France may not join a French tax consolidated group, so a cross-border arrangement cannot benefit from the 100% exemption.
Although the French government filed an appeal with the French higher administrative court against the administrative court of appeal of Versailles’s decision to request a preliminary ruling from the CJEU, AG Kokott did not wait for the outcome of the domestic court proceedings. She concluded that the French tax consolidation regime violates EU law because of the less favorable treatment of a French parent company with subsidiaries in other EU member states, as compared to the treatment of a French parent with only French subsidiaries.
The CJEU now must consider the case; although AG Kokott’s opinion is not binding on the court, it often follows the AG opinion. If the CJEU agrees with AG Kokott, the case may have an impact on regimes in other EU member states, including the Netherlands, and affected French parent companies may be entitled to obtain a refund of corporate income tax paid on the taxable 5% of dividends received from subsidiaries resident in other member states (provided certain conditions are satisfied). Affected groups should consider filing protective claims to preserve their rights to restitution for fiscal years 2012, 2013 and 2014 (no later than 31 December 2015 for corporate income tax paid in 2013) to avoid being barred by the statute of limitations and limited only to taxes assessed or paid within the two years before their claims.
Source: Deloitte